How Much Homeowner's Insurance Coverage do you Need?
New homebuyers are faced with many expenses and one of those is
homeowners insurance. If you have a mortgage on your home, your lender
will require you to have homeowners insurance. Even if you do not
finance the purchase of your home, it is still a good idea to make sure
that you take out a sufficient amount of homeowners insurance. Failure
to do so can leave you opens for significant losses. Just how much
homeowner's insurance coverage do you need; however?
There are many options available to you when you purchase homeowner's
insurance. There are several factors which should be taken into
consideration when determining how much homeowner's insurance you need.
At a minimum, you will need to make sure that you have enough insurance
in order to replace the property and the contents of the property in the
event something should happen. It is also important to keep in mind that
homeowner's insurance will cover the costs if you are found liable or
responsible for injuries that someone may sustain while they are on your
There are six categories of homeowner's insurance and understanding each
one will help you to determine how much homeowner's insurance is right
HO-1: This is the most basic form of insurance. It covers only
very specific threats and perils such as explosion, fire, windstorms,
riot, theft, volcanic eruptions and vandalism.
HO-2: This type of homeowner's insurance is broader and covers
additional perils that are not covered by HO-1. Perils covered under
this category of insurance include falling objects, frozen pipes, faulty
electrical units, weight of snow and ice and faulty heating systems.
HO-3: This is the broadest category of insurance. The only perils
that are not covered under this category of insurance are war,
earthquake and flood in most cases.
If you purchase an older that has been restored or you are planning to
purchase a home and restore it yourself, you will generally find that
the above mentioned categories of insurance are not sufficient. This is
because your home may be more valuable than what a normal homeowner's
insurance would cover. As a result, you will need to consider a category
of homeowner insurance that would pay the amount you would need to cover
the expenses related to replacing or repairing an older home. Category
HO-8 is the best category to consider in this case.
When it comes o deciding exactly how much insurance you need, it is
generally best to plan to purchase enough insurance to cover 100% of he
cost of rebuilding your home at current construction costs. Keep in mind
that this amount could be significantly different from the actual value
of your home. If construction costs have risen in your area recently,
you may need to insurance your home for more money than the actual
market value. If you are unsure of how much you need in terms of
insurance, consult your insurance agent or a local builder's
association. Generally, you can multiply local construction costs per
square foot by the square footage of your home to come up with a good
estimate. If you have extras such as a Jacuzzi; however, you should plan
for even more insurance.
When you actually purchase your home owner's policy, you will need to
choose between a cash value policy and a replace cost policy. A cash
policy will only pay for the current cash value of your home, less
depreciation. Replacement cost policies will pay the amount that it will
actually cost to rebuild your home. Replacement cost policies are
typically more expensive; however, if your home is completely destroyed
they can be far more beneficial.
Finally, make sure you purchase a sufficient amount of insurance to
cover liability issues as well as the contents of your home. Remember
that your home is not just the structure but all of your possessions as
well. You will want to make sure you have enough coverage for those
items. A typical policy provides coverage for between 50% and 75% of the
value of the property. If your possessions are more expensive; however,
you will need to consider purchasing more coverage for your contents.
In terms of liability insurance, a basic policy will typically provide
you with between $100,000 and $300,000 worth of coverage. If your
assets, including your home and a business if you own one, are worth
more than that; you should consider purchasing more liability insurance
to make sure you are completely protected in the event of a lawsuit.